Government Gives Big Edge to Large Investors in Florida Real Estate

Government Gives Big Edge to Large Investors in Florida Real Estate
March 15, 2013

The packaging of homes into multimillion-dollar real estate bundles by Fannie Mae and Freddie Mac has made South Florida real estate prime for the picking—if you’ve got the cash.

That’s meant tough times for small investors and a heyday for hedge funds and other institutional investors scouting for deals.

“What’s happening is Florida mortgages of foreclosed properties that were financed through FHA, Fannie Mae, and Freddie Mac are being bundled and sold to hedge funds,” said real estate analyst and consultant Jack McCabe, founder and chief executive officer of McCabe Research and Consulting in Deerfield Beach, Florida.

Individuals Shut Out

“The problem is that you have to be a very large entity to buy the properties,” McCabe said. “An individual like myself, or you, or anyone else, is never going to be able to qualify to buy these.”

McCabe believes the outsize role of the government, and of large investors, is creating imbalances in the real estate market, boosting property prices and rental rates and keeping homes out of the hands of individual owners.

Luis Valdeon, owner of The Miami Dade Foreclosure List, agreed.

“In four years, rentals went up 60 percent” in Miami, Valdeon said of an analysis he conducted using his data. Nationally, rental rates are forecasted to rise 4.6 percent this year, following a 4.1 percent bump last year, according to the National Association of Realtors.

Nationally, the number of single-family homes as a share of all rentals jumped from 30.8 percent to 33.5 percent between 2005 and 2010, the biggest registered increase among all types of rentals, according to a Fannie Mae analysis of Census data.

Hedge Funds Move In

The hedge fund operators that have McCabe worried recognize they can buy large numbers of houses, all clustered in one geographic area, to make managing the properties a whole lot easier. They go directly to Fannie’s and Freddie’s departments that handle distressed properties and buy the bundles before the properties go to auction, McCabe said.

Fannie Mae is the nation’s largest buyer of mortgages, with a portfolio worth $3.2 trillion in home loans, securities, and other guarantees as of November 2012.

It’s hard to pinpoint the exact number of homes scooped up by institutional investors, or by hedge funds, says Walter Maloney, spokesman for the National Association of Realtors.

That’s because they buy the properties using multiple companies’ names, said Peter Zalewski, real estate analyst and founder of Condo Vultures.

But there are some indicators, such as the increase in sales outside the traditional listing services such as MLS.com, Maloney said.

5,300 Florida Homes Purchased

Hedge funds and investment funds purchased some 5,300 Florida homes last year that were in some stage of foreclosure, according to RealtyTrac numbers reported by the Palm Beach Post.

“They just have loads of money and are paying maximum dollars for the properties, then renting them out,” Don Cameron, a real estate investor who owns a South Florida franchise of We Buy Ugly Houses, told the Post.  “Some people are really inflating the market right now.”

Paid in Cash

Another indicator that institutional investors have the upper hand: Some 30 percent of real estate transactions across the country between June 2011 and May 2012 were in cash. That figure was up from 10 percent a decade ago, according to a briefing by the Florida Realtors, citing a chief economist with the National Association of Realtors.

The website of the New York-based Blackstone Group, an investment company with a hedge fund division and one of the big players in Florida real estate,” states, “Blackstone has created a national platform, Invitation Homes, to purchase distressed single-family homes and then refurbish, lease and maintain them in neighborhoods across the country.” The company did not respond to a request for an interview..

Sold Above Market Value

McCabe says the funds have in some instances paid more than market value on properties. “I think they do it to manipulate the market and push the comparables for appraisals up.”

He also noted these massive sales affect not only local housing prices but also prices throughout the state.

An increase in housing prices is usually perceived as a good sign for the economy but could have detrimental effects long-term.

“Any time you have a company or a group of companies that can affect values for all the citizens in an area, whether it’s a city, a state, or a country, that goes against our free-market principles,” McCabe said.

Meanwhile, the list of metropolitan areas with high foreclosure rates grows.

Foreclosures were up 80 percent in Tampa and up 35 percent in Miami in 2012 compared to 2011, according to RealtyTrac.

Marianela Toledo (Marianela.Toledo@FloridaWatchdog.org) writes for FloridaWatchdog.org, where an earlier version of this article appeared . Used with permission.